1. Field of the Invention
The present invention generally relates to a system for providing loans to owners of life insurance policies who are terminally ill or aged. More specifically, the system comprises a statistical module, medical module and a financial module which together operate on a preselected group of inputs to yield a line of credit offered to the policyholder.
2. Description of the Related Art
There are many commercial reasons why life insurance policy holders may want to collect their death benefits prior to their death. Often the owner originally purchased the policy to provide financial support for minor children or a spouse with a long life expectancy in the event of the death of the wage-earning insured. As the insured grows older and retires, those reasons for owning life insurance may no longer apply. Instead, both the terminally ill and the elderly often face the dilemma of owning significant life insurance policies, yet not having sufficient funds for present-day expenses. The insured needs access to the life insurance proceeds while alive for paying rent and buying groceries as well as for luxuries such as taking a vacation. Also, access to life insurance proceeds can allow for estate planning transactions such as paying off a home mortgage, purchasing annuities for family members, or avoiding the sale of appreciated assets eligible for stepup in basis at death. Finally, terminally ill individuals often need sophisticated medical treatments which are classified as experimental or not FDA-approved. Many health policies do not cover these treatments, and the patient is left to his or her own financial resources which may be limited or illiquid.
A number of previously known methods address these difficulties by exploiting life insurance policies held by the elderly or the terminally ill. One of these is the Accelerated Death Benefit Option ("ADBO") offered by some life insurance companies to permit the insured an opportunity to "cash out" his death benefits under certain restrictive conditions. Under ADBOS, the insurance company offers to pay to an insured while still living the death benefits payable under his or her life insurance policy less a discount to reflect an interest charge. ADBOs are governed by state insurance laws and regulations. In 1991, the National Association of Insurance Commissioners (NAIC) adopted an Accelerated Benefits Model Regulation which has been adopted by many states. Following the NAIC model, many state regulations restrict ADBC to policyholders with less than twelve months to live and limit the interest rate used to calculate the applicable discount. In practice, most insurance companies only offer the option to insureds with six months or less to live, limit the ADBO to a portion of the full face value, and require that the policyholder obtain a doctor's certification of his or her limited life expectancy. ABDOs present several drawbacks. First, as a practical matter, doctors are often reluctant to provide the certification required by state regulation. Second, for federal tax purposes, it is currently unclear whether ADBO payments qualify as insurance proceeds payable under an insurance contract which are excluded from income or are fully taxable. The IRS has issued proposed regulations which exclude from income "qualified accelerated death benefits" which are defined as certain accelerated payments to insureds with illnesses expected to result in death within twelve months. In addition, similar legislative proposals have been made in Congress. Until any of those regulatory or legislative proposals are finalized, ABDOs should be treated as fully taxable income. Third, use of an ADBO yields proceeds that may violate the "limited assets" test used to determine eligibility for Medicaid, hospice care, and supplemental income benefits.
A second known method of providing funds consists of loans offered by life insurance companies to their existing policyholders. A first drawback with this method is that, by state regulation, the loan amount is limited to the cash surrender value of the policy, not the policy's face amount. This requirement imposes a severe limitation on policyholders having little cash value in their policies. The extreme case is presented by term or group insurance policies which, having no cash surrender value, are ineligible for policy loans of this sort. Even in the best case, cash surrender values rarely exceed 50% of the policy's face amount. A second drawback of extending a loan based on an existing life insurance policy is that state regulation also caps the interest rate that insurance companies may charge for such loans. The fact that these regulated rates are generally below market rates of return presents a significant disincentive for insurance companies to offer the loans.
A third known method of offering funds to patients having short life expectancies is practiced by companies known as "viatical settlement companies". These companies purchase policies from terminally ill patients at a discount to their face value often from 20% to 50%. Upon the insured's death, the viatical settlement company collects the full face amount of the insurance policy. The financial return to the viatical company is based on the discount used to determine the purchase price and the length of time until the insured dies. There are several disadvantages to the insured from selling a policy to a viatical company. First, the transaction is a sale of the policy and not a loan against the policy, and the proceeds constitute taxable income to the insured. Second, unlike a loan, if the insured dies quickly, the viatical company collects a windfall as no residual benefits are owned to the insured's estate. Third, as with ADBO's, sale to a viatical company yields income that may result in violations of the governmental needs-based tests, thereby rendering the patient ineligible for various benefits. Many states are currently enacting regulation based on the NAIC Viatical Settlements Model Regulation to impose limits on the discount rates used (by imposing minimum percentages of face value based on life expectancies) and to impose licensing and reporting requirements.